How To Eliminate Debt For Strategic Buy-Side Representation

Article | April 1, 2019

In this article, you will learn a strategy that eliminates debt from a distressed business and transforms it into a saleable entity in a matter of weeks. This method not only provides an attractive entry price for your buyer, but it will also change the way you assess opportunities, drastically increasing your deal flow.

Every day you walk away from acquisitions where the seller has overpriced her business in an attempt to address the debt load—given that the value of the underlying business does not support the asking price, much less your fees. While you might see an attractive core business value, the subordinate debt schedule makes the deal prohibitive.

In this article, you will learn a strategy that eliminates debt from a distressed business and transforms it into a saleable entity in a matter of weeks. This method not only provides an attractive entry price for your buyer, but it will also change the way you assess opportunities, drastically increasing your deal flow.

A Better Way

You’re likely familiar with Article 9 of the Uniform Commercial Code as a means of transacting on an asset base in a private sale. What many don’t know is that the assets liquidated via an Article 9 transaction can be sold into a new purchasing entity. As a result, the continuity and value of the business operation are preserved, and you’re positioned to arrange the acquisition based on the value of the assets.

Over the past ten years, Second Wind Consultants has conducted thousands of Article 9 reorganizations in the distressed space. An alliance with Second Wind can improve and streamline your acquisition posture and allow you to value a company’s revenue, margins and EBIDTA, while we use the Article 9 to handle the complexity of multiple creditors and UCC filings.

Why Article 9 is So Effective

The Article 9 short sale transaction is different from traditional short sales because it requires only the consent of the first position secured creditor, who is incentivized to recover maximum value on their collateral.

Furthermore, after a ten-day notice period to subordinate creditors, the assets are transferred to the new purchasing entity, completely free of liens. Subordinate creditors have limited ways to challenge this type of transaction, mostly focusing on adequate consideration for the assets being sold. A proper Article 9 will require the first position creditor to obtain third-party valuations and appraisals of the assets in order to ensure this doesn’t occur.As a result, the process is frictionless and streamlined.

Everybody Wins

What makes this method such a valuable strategy is the fact that everyone in the transaction stands to benefit. Your buyer gets an attractive entry price equivalent to only the hard asset value, and any additional intangible value of the company may be considered via a consulting or earn-out agreement with the previous owner that is based on performance. This mitigates the initial cost for your buyer, and hedges the downside risk, assuring him that he will get his initial ROI.

Furthermore, the seller gets a successful exit rather than being left with a string of personal guarantees and bankruptcy and, therefore, little incentive to close.

Finally, with knowledge of this strategy, intermediaries can actively seek businesses in distress, finding great deals in what they previously overlooked. You can begin valuing potential listings based on top-line performance, gross margins and asset value rather than viewing the business’ debt structure as an obstacle to closing.

Leveraging specialized expertise lets you dominate a subsector before others even know it exists. If you can make the most out of deals others throw away, you will command higher pricing and create loyalty and brand recognition.Start the conversation with Second Wind today to find out more about how a strategic alliance can expand your deal flow, increase your ROI, incentivize deals that would otherwise not close, and give you the competitive advantage you need.